Legal Review Of The Effectiveness Of Islamic Banking Financing On Small And Medium Enterprises In Indonesia

Faris Faturahman; Fajar Dwi Arnanda; Mohammad Rachman Asa; Hikmal Fahrul Firmansyah

Authors

Faris Faturahman Faculty of Law and Political Science, Muhammadiyah University Surakarta Author
Fajar Dwi Arnanda Faculty of Law and Political Science, Muhammadiyah University Surakarta Author
Mohammad Rachman Asa Faculty of Law and Political Science, Muhammadiyah University Surakarta Author
Hikmal Fahrul Firmansyah Faculty of Law and Political Science, Muhammadiyah University Surakarta Author

Abstract

This study analyzes the effectiveness of financing provided by Islamic banks for the development of Micro, Small, and Medium Enterprises (MSMEs) in Indonesia. MSMEs play a strategic role in the national economy by employing more than 97% of the workforce and contributing over 60% of the Gross Domestic Product (GDP). Despite their importance, MSMEs continue to face significant obstacles in accessing financing from conventional institutions, including limited collateral and low levels of financial literacy. In this context, Islamic banking offers an alternative financing system grounded in fairness, partnership, and the prohibition of usury, with instruments such as murabahah, mudharabah, and musyarakah. This study addresses two main issues: (1) the characteristics of Islamic banking contracts and financing schemes tailored to MSME needs, and (2) the extent to which Islamic financing enhances MSMEs’ capacity, turnover, and sustainability. Using a descriptive qualitative method through literature review and interviews, the findings show that Islamic financing contributes positively to MSME growth. However, its implementation is hindered by low financial literacy, limited accessibility, and conservative practices within financial institutions. Therefore, strengthening regulatory frameworks, developing adaptive financial products, and integrating financing with education and business mentoring are essential steps. In conclusion, Islamic banking financing has the potential to significantly empower MSMEs, but its success depends on consistent legal support, innovative product design, and improved financial literacy. These measures will ensure that Islamic finance becomes a more inclusive and sustainable instrument for Indonesia’s economic development.

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